At a glance

  • Homeowners who have seen their savings build up in recent months may have a golden opportunity to take years off their mortgage term or even clear the entire debt
  • By eating into the interest due, relatively modest overpayments can help you get a much better deal when you next remortgage
  • Money overpaid can’t be retrieved and there may be a risk of charges, so it’s vital to make sure it’s the right move for you

At a glance

  • Homeowners who have seen their savings build up in recent months may have a golden opportunity to take years off their mortgage term or even clear the entire debt
  • By eating into the interest due, relatively modest overpayments can help you get a much better deal when you next remortgage
  • Money overpaid can’t be retrieved and there may be a risk of charges, so it’s vital to make sure it’s the right move for you

At a glance

  • Homeowners who have seen their savings build up in recent months may have a golden opportunity to take years off their mortgage term or even clear the entire debt
  • By eating into the interest due, relatively modest overpayments can help you get a much better deal when you next remortgage
  • Money overpaid can’t be retrieved and there may be a risk of charges, so it’s vital to make sure it’s the right move for you

It’s the biggest financial commitment many of us will ever make, and in most cases it’s one that we’re stuck with for at least a couple of decades.

So for mortgage borrowers, the idea of being able to reduce the repayment term or clear the debt entirely is something of a financial dream. For some people, however, that freedom may now be closer to reality. While many households have suffered often serious and lasting financial damage as a result of the coronavirus crisis, a significant proportion have seen their savings increase.

Spending levels plunged by around a quarter during the initial lockdown, according to the Institute for Fiscal Studies1, as shops closed, travel opportunities were curtailed and socialising was effectively banned. That left many households with extra disposable income that could be used for other purposes.

Among the most compelling options for mortgage borrowers is to use the extra savings to cut the loan term or pay it off entirely. It’s not always the right move, but where it is suitable it can be a very effective one.

Here are some of the questions to weigh up if you’re thinking about taking that step.

What are the benefits of overpaying or clearing my mortgage?

The most obvious one is that by increasing the rate at which the interest and/or the capital is repaid, you can potentially take years off your repayment schedule.

For example, say you have a mortgage of £200,000 with a term of 25 years and an interest rate of 3%. Adding £150 to the monthly payments would save £17,338 interest over the term and cut the term by four years and eight months. Overpaying by £250 a month takes more than £25,350 off the interest and six years and 11 months off the mortgage term2.

To work out how it might make a difference for you, check out one of the many mortgage overpayment calculators available online. If your outstanding mortgage is now quite modest, overpaying might enable you to clear the rest and take full ownership of your home.

Even if you’re not able to do that, increasing your equity makes it easier to get a competitive deal next time you come to remortgage. Switching to a lower interest rate at the end of your existing deal (or immediately, if there’s no early repayment penalty) further increases your chances of paying off the mortgage ahead of time.

Why now?

If you have saved as a result of lower spending levels, your first instinct might be to park the money in a savings account. And usually, that would make sense if the interest rate paid on your savings was higher than you pay on your mortgage.

But in the current low interest rate environment that’s unlikely to be the case, while the spending power of your money may be eroded by the effects of inflation. But those low interest rates have also driven mortgage costs to record lows, making it easier to eat into interest repayments. In other words, you’ll save much more interest from overpaying than you would gain by leaving the money in a cash account.

Will my lender let me do this?

Most will allow borrowers to overpay up to 10% of their mortgage in a year. The overpayment amount is often uncapped on standard variable rate (SVR) deals, although the interests rates are usually much higher than fixed or tracker mortgages. Make sure you speak to your lender before you amend your monthly payments, however. There may be a charge for overpaying by too much, with the risk of the penalty offsetting the savings you’ve made.

Is it always a good idea to prioritise clearing my mortgage?

There are several instances in which it’s not. Any outstanding unsecured debts should be addressed first, not least because credit cards, loans, overdrafts and similar products tend to be expensive. It’s advisable to make sure you’ve got a financial buffer in place too, in the form of a rainy-day fund of ideally three to six months of income. Money overpaid is difficult to get back again, so it’s rarely a smart move to divert all your savings into clearing your mortgage, however tempting it may be.

Clearing your mortgage might also be ill advised if your pay tends to fluctuate, perhaps because you rely heavily on commission or bonuses. However, some lenders may offer the flexibility to overpay as and when you can, rather than by a fixed amount each month.

It’s the biggest financial commitment many of us will ever make, and in most cases it’s one that we’re stuck with for at least a couple of decades.

So for mortgage borrowers, the idea of being able to reduce the repayment term or clear the debt entirely is something of a financial dream. For some people, however, that freedom may now be closer to reality. While many households have suffered often serious and lasting financial damage as a result of the coronavirus crisis, a significant proportion have seen their savings increase.

Spending levels plunged by around a quarter during the initial lockdown, according to the Institute for Fiscal Studies1, as shops closed, travel opportunities were curtailed and socialising was effectively banned. That left many households with extra disposable income that could be used for other purposes.

Among the most compelling options for mortgage borrowers is to use the extra savings to cut the loan term or pay it off entirely. It’s not always the right move, but where it is suitable it can be a very effective one.

Here are some of the questions to weigh up if you’re thinking about taking that step.

What are the benefits of overpaying or clearing my mortgage?

The most obvious one is that by increasing the rate at which the interest and/or the capital is repaid, you can potentially take years off your repayment schedule.

For example, say you have a mortgage of £200,000 with a term of 25 years and an interest rate of 3%. Adding £150 to the monthly payments would save £17,338 interest over the term and cut the term by four years and eight months. Overpaying by £250 a month takes more than £25,350 off the interest and six years and 11 months off the mortgage term2.

To work out how it might make a difference for you, check out one of the many mortgage overpayment calculators available online. If your outstanding mortgage is now quite modest, overpaying might enable you to clear the rest and take full ownership of your home.

Even if you’re not able to do that, increasing your equity makes it easier to get a competitive deal next time you come to remortgage. Switching to a lower interest rate at the end of your existing deal (or immediately, if there’s no early repayment penalty) further increases your chances of paying off the mortgage ahead of time.

Why now?

If you have saved as a result of lower spending levels, your first instinct might be to park the money in a savings account. And usually, that would make sense if the interest rate paid on your savings was higher than you pay on your mortgage.

But in the current low interest rate environment that’s unlikely to be the case, while the spending power of your money may be eroded by the effects of inflation. But those low interest rates have also driven mortgage costs to record lows, making it easier to eat into interest repayments. In other words, you’ll save much more interest from overpaying than you would gain by leaving the money in a cash account.

Will my lender let me do this?

Most will allow borrowers to overpay up to 10% of their mortgage in a year. The overpayment amount is often uncapped on standard variable rate (SVR) deals, although the interests rates are usually much higher than fixed or tracker mortgages. Make sure you speak to your lender before you amend your monthly payments, however. There may be a charge for overpaying by too much, with the risk of the penalty offsetting the savings you’ve made.

Is it always a good idea to prioritise clearing my mortgage?

There are several instances in which it’s not. Any outstanding unsecured debts should be addressed first, not least because credit cards, loans, overdrafts and similar products tend to be expensive. It’s advisable to make sure you’ve got a financial buffer in place too, in the form of a rainy-day fund of ideally three to six months of income. Money overpaid is difficult to get back again, so it’s rarely a smart move to divert all your savings into clearing your mortgage, however tempting it may be.

Clearing your mortgage might also be ill advised if your pay tends to fluctuate, perhaps because you rely heavily on commission or bonuses. However, some lenders may offer the flexibility to overpay as and when you can, rather than by a fixed amount each month.

It’s the biggest financial commitment many of us will ever make, and in most cases it’s one that we’re stuck with for at least a couple of decades.

So for mortgage borrowers, the idea of being able to reduce the repayment term or clear the debt entirely is something of a financial dream. For some people, however, that freedom may now be closer to reality. While many households have suffered often serious and lasting financial damage as a result of the coronavirus crisis, a significant proportion have seen their savings increase.

Spending levels plunged by around a quarter during the initial lockdown, according to the Institute for Fiscal Studies1, as shops closed, travel opportunities were curtailed and socialising was effectively banned. That left many households with extra disposable income that could be used for other purposes.

Among the most compelling options for mortgage borrowers is to use the extra savings to cut the loan term or pay it off entirely. It’s not always the right move, but where it is suitable it can be a very effective one.

Here are some of the questions to weigh up if you’re thinking about taking that step.

What are the benefits of overpaying or clearing my mortgage?

The most obvious one is that by increasing the rate at which the interest and/or the capital is repaid, you can potentially take years off your repayment schedule.

For example, say you have a mortgage of £200,000 with a term of 25 years and an interest rate of 3%. Adding £150 to the monthly payments would save £17,338 interest over the term and cut the term by four years and eight months. Overpaying by £250 a month takes more than £25,350 off the interest and six years and 11 months off the mortgage term2.

To work out how it might make a difference for you, check out one of the many mortgage overpayment calculators available online. If your outstanding mortgage is now quite modest, overpaying might enable you to clear the rest and take full ownership of your home.

Even if you’re not able to do that, increasing your equity makes it easier to get a competitive deal next time you come to remortgage. Switching to a lower interest rate at the end of your existing deal (or immediately, if there’s no early repayment penalty) further increases your chances of paying off the mortgage ahead of time.

Why now?

If you have saved as a result of lower spending levels, your first instinct might be to park the money in a savings account. And usually, that would make sense if the interest rate paid on your savings was higher than you pay on your mortgage.

But in the current low interest rate environment that’s unlikely to be the case, while the spending power of your money may be eroded by the effects of inflation. But those low interest rates have also driven mortgage costs to record lows, making it easier to eat into interest repayments. In other words, you’ll save much more interest from overpaying than you would gain by leaving the money in a cash account.

Will my lender let me do this?

Most will allow borrowers to overpay up to 10% of their mortgage in a year. The overpayment amount is often uncapped on standard variable rate (SVR) deals, although the interests rates are usually much higher than fixed or tracker mortgages. Make sure you speak to your lender before you amend your monthly payments, however. There may be a charge for overpaying by too much, with the risk of the penalty offsetting the savings you’ve made.

Is it always a good idea to prioritise clearing my mortgage?

There are several instances in which it’s not. Any outstanding unsecured debts should be addressed first, not least because credit cards, loans, overdrafts and similar products tend to be expensive. It’s advisable to make sure you’ve got a financial buffer in place too, in the form of a rainy-day fund of ideally three to six months of income. Money overpaid is difficult to get back again, so it’s rarely a smart move to divert all your savings into clearing your mortgage, however tempting it may be.

Clearing your mortgage might also be ill advised if your pay tends to fluctuate, perhaps because you rely heavily on commission or bonuses. However, some lenders may offer the flexibility to overpay as and when you can, rather than by a fixed amount each month.

References

1. IFS, Spending and saving during the COVID-19 crisis: evidence from bank account data, October 2020

2. Money Saving Expert, Overpayment calculator

Links from this website exist for information only and we accept no responsibility or liability for the information contained on any such sites. The existence of a link to another website does not imply or express endorsement of its provider, products or services by St. James's Place. Please note that clicking a link will open the external website in a new window or tab.

References

1. IFS, Spending and saving during the COVID-19 crisis: evidence from bank account data, October 2020

2. Money Saving Expert, Overpayment calculator

Links from this website exist for information only and we accept no responsibility or liability for the information contained on any such sites. The existence of a link to another website does not imply or express endorsement of its provider, products or services by St. James's Place. Please note that clicking a link will open the external website in a new window or tab.

References

1. IFS, Spending and saving during the COVID-19 crisis: evidence from bank account data, October 2020

2. Money Saving Expert, Overpayment calculator

Links from this website exist for information only and we accept no responsibility or liability for the information contained on any such sites. The existence of a link to another website does not imply or express endorsement of its provider, products or services by St. James's Place. Please note that clicking a link will open the external website in a new window or tab.

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